How to Save for Your Child’s College Education

Whether you hope to fund part or all of your child’s college education, here’s how to get started. Photo: Maxime McDuff

When families talk about college, the subject of money is never far behind. Seeing so many graduates overloaded with student loan debt, with 19% of borrowers owing more than $50,000 upon graduation, can be pretty scary for parents and students alike.

As parents, you think the best thing you can do for your children is to encourage them to go to college and get a good education — and, hopefully, that will help them land good jobs with higher earning power than if they had high school diplomas alone. But that’s an expensive goal. It’s especially daunting considering that many parents are still paying off their own student loans, while their children born today could end up paying up to four times the current price for tuition if inflation keeps up, according to finaid.org.

But where do you start saving for your child’s education? The option for many is to not start at all. Only 36% of middle-income families and 29% of low-income families are putting money away for their kids’ college fund, according to a study by Sallie Mae. The study also found that the average family is planning to save around $38,953 per child for college, but on average will only save about $19,784.

Here are some ways to start saving for your child’s education, and tips to help them fund their education in other ways as well:

College Saving Plans

529 College Plans

More than 30 states offer a 529 college savings plan, also known as Qualified Tuition Programs (QTP). Here’s how they work: You typically invest after-tax money into the plan, and you’re then allowed to withdraw the funds (and any investment gains) tax-free for use toward qualified education expenses, such as college tuition and books. Each state’s plan offers various investment options, annual fees, and operating costs. Contribution limits vary, but tend to be quite high compared to Roth IRAs.

If your child doesn’t end up going to college, you may face fees and tax penalties when withdrawing the funds, though you can often transfer the account to another beneficiary. You can usually begin contributing in small increments, but, depending on the specific 529 plan, you may only be able to make a change to your account once a year.

Roth IRA

A Roth IRA is a popular type of tax-advantaged retirement savings account, but it can also be used as a college savings vehicle. Like 529 plans, you contribute after-tax money, and any investment gains can be withdrawn later tax-free — most often, after age 59-1/2, for retirement.

But Roth IRAs also allow you to take out funds tax- and penalty-free to pay for qualifying educational expenses after five years. (You can also tap a Roth IRA without penalty to make a down payment on a house.) That makes it an appealing way to hedge your bets: If you’re child doesn’t go to college, you can still use the funds for your retirement.

However, there are income and contribution limits. Single taxpayers earning more than $129,000 per year ($191,000 for married couples) are not eligible, and you can only contribute $5,500 per year ($6,500 if you’re over age 50).

Prepaid College Tuition Plans

These plans are exactly what they sound like: They allow you to pay for portions of your child’s college tuition now, locking in current prices — protecting you from exponential tuition hikes if your child is still years away from attending college.

So if tuition at Big State College is currently $10,000 a year, a $5,000 contribution today will buy you 50% of a year’s tuition (or one semester’s worth) — whenever your child is ready to attend school and cash it in. That means that, if tuition at Big State swells to $20,000 a year by the time your kid turns 18, your $5,000 investment will be worth $10,000 in tuition — still 50% of the total bill.

Coverdell Education Savings Account

Similar to 529 college plans, a Coverdell ESA is generally tax-advantaged if the money is used to pay for educational expenses. And, like a 529, it’s also considered your asset — not your child’s — so it will have less impact on your child’s chance of getting federal aid.

Unlike a 529, Coverdell ESAs can be used to cover any educational expenses, including K-12 costs such as private school tuition.

However, there are some limits: You can only contribute $2,000 per year per child, and eligibility starts to phase out for couples earning more than $190,000 a year ($95,000 for singles). Funds not used by the time your child is 30 may be subject to a taxes.

UGMA and UTMA Custodial Accounts

These types of accounts, where financial gifts to a minor are held in a custodial account until the child reaches adulthood, offer another option for saving for your child’s education.

They offer some tax benefits, but fewer than 529 plans. And unlike the other saving options, these types of accounts can also be considered your child’s asset, not yours — which means they can affect the amount of federal aid your child qualifies for when filling out the FAFSA.

One more thing to think about: The money belongs to your child, so at age 18 or 21, he or she can use it to pay for college like you imagined… or for something else entirely.

Other Programs to Help Fund Your Child’s Education

Gift of College

This program allows other family members and friends to give a gift directly to your 529 college savings plan. It’s free for you to register, but there is a 5% processing fee (up to $15 per transaction) when you receive a gift.

You create a profile for your child, and your family and friends can give a gift that way. Instead of giving toys or clothes for birthdays, holidays, or other occasions, ask loved ones to make a gift this way, as it can make a more lasting impact on a child’s life.

With this Visa card from Fidelity, you can earn 1.5% on the first $15,000 spent per year, then 2% after that. All of your reward earnings get directly deposited into your Fidelity-managed 529 savings account — so of course you must open an account with Fidelity first. Charging $1,000 a month on your card would earn $180 a year for your savings plan — hardly enough to pay for college, but every bit helps, and it can grow from there if the stock market cooperates.

Now, this may be an obvious statement, but don’t go into credit card debt trying to save. Only charge purchases you can afford and that you would be making anyway, such as utilities, your cell phone bill, groceries, and a cable bill. Be sure to pay off the balance in full each month to avoid interest accruing and credit card debt rising.

Fidelity Rewards American Express Card

This is another credit card that requires a Fidelity account to reap the benefits. You can earn 2% cash back on purchases when you direct your deposit into your Fidelity 529 account. Every 2,500 points equals a $50 deposit.

Other family members can also link their card rewards to go directly into your Fidelity-linked account to boost your rewards even more.

Upromise

Register for a free account on Upromise to earn cash back for college on shopping and dining. You can earn money by registering your credit cards, loyalty cards, and grocery cards, and then receive cash back on eligible purchases.

Anytime you’re shopping online, simply start out on the Upromise website, click through their links, and you’ll be instantly earning cash back on a percentage of your purchase. You can then link your Upromise account to a 529 college savings account or to existing Sallie Mae student loans.

For additional earnings, you can apply for a Upromise Credit Card, where you’ll earn an additional 5% cash back on certain eligible purchases, 4% at participating restaurants, 3% on gas at eligible locations, 2% at participating movie theaters and 1% on everything else.

LEAF College Savings

Similar to GiftofCollege.com, Leaf also offers family and friends a way to give a monetary gift toward your child’s education. They pick the amount of the gift card and send it to you via mail, Facebook, or email. Then, you simply redeem the gift by entering the number on the card. That gift can be transferred to any 529 college savings plan.

General College Saving Tips

Start early: Saving $50 per month from the day a child’s born could give you $20,000 by the time he or she turns 17, assuming a 7% return on investment, according to Finaid.org. However old your children are, if you want to help fund their college education, start saving. It is never too early, or too late, to start saving for your child’s college.

Keep big account balances in your name: A student doesn’t lose any financial aid if they have $3,000 or under in a checking or savings account, according to Bankrate. But 20 cents is subtracted from every dollar above that $3,000 mark. So a symbolic savings account in their name is fine for birthday checks and the like, but if an account starts accumulating some serious cash, leave it in your name.

Find more ways to save: Analyze your spending to see if there’s anything you can cut out to increase your savings. Finding ways to save and making cuts can really add up over time.

Automate your savings: The simplest way to start saving is to make it easier on yourself. See if you’re able to automatically deposit a portion of your paycheck into a 529 college account or any savings account for that matter. Enroll in Bank of America’s Keep the Change program, where your purchases are rounded up and added to a savings account, or utilize other ways to save with technology.

Set your savings goals: Regardless of where you are with saving for your child’s education and how long you have, create a game plan. Figure out how much you can save each month, and make goals. This will help you stay motivated and stay on track.

Prioritize your finances: The world doesn’t stop for college savings, nor does the rest of your financial needs. You need to pay off any debt, especially any credit cards or other high-interest debt. You also need to pay off your own student loans (if you have any), establish an emergency fund for yourself, and save for retirement as well.

What Happens When You Just Can’t Financially Help?

Sometimes the dream of paying for your child’s education is just not within your reach. Or maybe, like some parents, you want your child to pay for their own education to learn how to stand on their own feet and become independent. Either way, there are still things you can do to reduce their student loan debts and how much they’ll have to pay.

Motivate them in high school. Work hard to encourage them and keep them motivated during high school. The better grades they have, the more likely they’ll be able to receive scholarships. High grades can also mean they’re eligible for advanced placement courses, which can count toward college credits and therefore reduce the amount of tuition owed. Also encourage them to volunteer and participate in extracurricular activities to increase their chances of getting scholarships.

Encourage them to work through high school. As soon as they can get a job, encourage them to do so. This may require your participation, such as driving them to work or helping them fill out taxes when that time rolls around. Have a discussion about what percentage of each paycheck should be put toward college.

Help them apply for scholarships. When the time comes, encourage and help them to apply for scholarships.

Teach them about student loans. A vital thing you can do for your child is take the time to teach them about financial aid, student loans, what they’ll owe upon graduation, and what that will mean for them in the long run. Help them keep track of financial aid deadlines and make sure your child fills out the FAFSA. This conversation can lead to ways to reduce their student loans while still in school, such as encouraging them to stick to a budget, not misuse student loans, and picking an affordable college to start with.

Encourage them to enroll in GradeFund. GradeFund.com is a website that allows your child to register and to motivate friends and family to give gifts toward their education. Again, in lieu of a clothing store gift card or new gadget, people can make a gift toward your child’s education. You can sign up when your child is in high school. Once you sign up for an account, family and friends can challenge your child to a specific academic achievement — such as getting a specific GPA. He or she can choose to accept that challenge, then at the end of the semester, upload transcripts for approval. If they meet the challenge, they’ll be awarded the gift. Visit GradeFund.com for more information.

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